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January 9, 2019 | Oversold is Not the Same as Undervalued

Lobo Tiggre, aka Louis James, is the founder and CEO of Louis James LLC, and the principal analyst and editor of the Independent Speculator. He researched and recommended speculative opportunities in Casey Research publications from 2004 to 2018, writing under the name “Louis James.” While with Casey Research, he learned the ins and outs of resource speculation from the legendary speculator Doug Casey. Although frequently mistaken for one, Mr. Tiggre is not a professional geologist. However, his long tutelage under world-class geologists, writers, and investors resulted in an exceptional track record. The average of the yearly gains published for the flagship Casey publication, the International Speculator, was 18.5% per year during Tiggre’s time with the publication. A fully transparent, documented, and verifiable track record is a central feature of IndependentSpeculator.com services going forward. Another key feature is that Mr. Tiggre will put his own money into the speculations he writes about, so his readers will always know he has “skin in the game” with them

When Wall Street was melting down towards the end of 2018, I frequently heard the talking heads on financial media saying the market was oversold.

The term has a general meaning of price being below “true” value—whatever that is. In this sense, assuming there’s some reasonably objective measure of value, oversold does mean undervalued.

But the term also has a more specific “technical” term. A stock or other asset is oversold if its price drops below a certain boundary that tends to limit prices around a certain average. If the reasonably objective value of an asset has fallen with its price, an asset being technically oversold need not mean it’s undervalued.

A technically oversold asset could even be overvalued, if the price hasn’t fallen enough to reflect the actual loss of value.

The problem with this is that the talking heads on financial media often fail to make clear which kind of oversold they mean. Saying that something is oversold can encourage viewers to buy at precisely the wrong time.

But showing that something is actually undervalued takes a lot more work than showing that something is technically oversold. That’s the sort of work people usually have to pay for.

My sense is that it’s best to ignore any oversold opportunities pointed out by people who don’t also make a compelling case for the asset being undervalued.

However, there’s a bigger problem…

What if something looks legitimately undervalued, given recent market realities, but its actual value has changed drastically—or is about to?

For example, what if a surge in lamp oil production made lamp oil look oversold and undervalued, just before Edison and Tesla began the electrification of America?

I have a very specific concern along these lines today: I think the unprecedented steps the Fed, the ECB, and other central banks took in the wake of the Crash of 2008, have created a “new normal” that is not at all normal and cannot last.

If I’m right about that, then both technical and value-based assertions that any given asset is oversold are going to be, at best, wildly inaccurate.

The very sharp investors and analysts we see talking about how oversold mainstream markets are, don’t even consider the possibility that the benchmarks and valuations established over the last few years could all exist in a giant bubble. The great buying opportunities they point out could be no different from the exhortations of the crypto crowd to pile into Bitcoin a year ago.

I’m not saying that the Dow or S&P 500 is like Bitcoin a year ago. I’m not shorting them either. (Though I have done that when I was more certain they were on the verge of a big fall.)

I just think it’s dangerous and irresponsible for financial professionals to fail to even consider the possibility that their metrics could be misleading.

Then again, I wouldn’t blame a horse for not seeing what’s hidden by his blinders.

But I would prefer to ride a horse that’s free to see the world as it is.

Caveat emptor,

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January 9th, 2019

Posted In: Louis James

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